Are you an investor or trader?
We hear about the “property investor” all the time, but have you heard of the elusive “property trader” ? Many people often proclaim themselves to be investors, though seldom do they say they are trading in properties.
Also a ‘property speculator’, a person who trades in property is one who tries to gain income through purchasing property. They then flip it quickly when the property has received significant capital gains or after renovations.
A property investor buys into property with the intention of renting it out or producing long-term capital growth. In juxtaposition, an investor typically holds on to a property for longer than a trader.
Why should I care? It is important to know the differences between the two. There may be implications for capital gains tax (CGT), income tax and goods and services tax (GST).
Property traders looking to renovate before reselling may have to register for GST if the renovations are substantial. In a once-off profit-making activity, you must report in your income tax return and what the net profit or loss from the renovation was. But what if you run a business of ‘flipping’ properties? In this case the purchased properties are regarded as trading stock. Then the costs of buying and renovating them form part of the cost of your trading stock until they’re sold.
Even if you have lived in one of the properties for a short period, CGT doesn’t apply to these assets held as trading stock, and concessions such as the CGT discount, small business concessions and main residence exemption don’t apply to any income from the sale of the properties. With this in mind, the important principle about the distinction between trading and investing is intention. Somebody’s intent is the fundamental way to determine the nature of the transaction, not simply the bare facts such as the time between purchase and sale.
If you can show you bought the property intending to hold it for its income, the fact that you sold it as a result of getting a good offer shortly afterwards doesn’t necessarily redefine the transaction into one of trade.
About the author: Oren Flamm is the General Manager at Hodges Caulfield and is passionate about a few things. There’s his school-teacher wife, Natalie, his new born son Aidan, the loyalty of great friends, the love for his close-knit family, his beloved Bombers and, of course, real estate. For Oren, failure is never an option. It’s a determination that makes him an impressive auctioneer – committed to delivering brilliant results. “In the end, we are the facilitators of people’s dreams,” says Oren. To get in touch with Oren, visit Hodges Caufield’s agency page.